Creating and Capturing Value with the Internet of Things (IoT): Commercializing New Products
As the Internet of Things (IoT) creates a world of connected devices, it also opens up possibilities to reframe established business models to deliver more customer value and more profitability. This offers companies disruptive opportunities. Business model innovation is one of the most rewarding, yet challenging, types of innovation.
In a panel session facilitated by Blue Canyon Partners at MAPI’s 2017 Executive Summit, a small group of manufacturing company CEOs and presidents met to discuss strategies for creating and capturing value from IoT. The panel featured executives with experience from companies such as Emerson, Zebra Technologies, Johnson Controls, and Komatsu. This blog post is the third in a three-part series outlining the key takeaways and lessons learned from the session. It explores the different business models manufacturing companies use to commercialize their IoT offerings and common challenges they encountered along the way.
Read the first blog post to learn what panelists would have done differently on their IoT journey or read the second blog post to learn more about the challenges companies face accelerating IoT development.
Picking a Winning IoT Business Model
Connected devices offer a number of different paths to new revenue streams, but most companies initially struggle to identify the best ones. Pressure from competitors can drive companies by fear instead of a clear strategy. Unless a company has an exceptional product management organization, organizational siloes often lead to decisions about products, services, value, and pricing being made by different parts of the business. Under these conditions, it can be arduous to launch a new business model. Innovation is not just creativity and luck. It demands a foundation of customer understanding, market insights, and long-term thinking.
There is no question that each company has different reasons for developing IoT solutions. Each company also faces different market conditions, so one business model should not fit all. IoT business models range from free value-enhancements to freemium models to bundled products and services. Unfortunately, half of our panelists expressed remorse about the initial business model their companies chose. One of the panelists reflected on their early decision not to charge customers for data: “In hindsight, would we have decided to give the data away for free? No! We would have said there is value here, and if we only priced at $50/unit, it would have set us up better for the future as we added more features.” Another panelist lamented the opposite, “We wanted to get paid at every stage. We had an inventory planning suite for which customers had to pay. In retrospect, if we gave away the basic suite for free, then we would have brought them into our ecosystem and could later upsell advanced features. In a lot of these products/services, it is about capturing customer interest, having an installed base, and bringing customers into your ecosystem. Once connected with our IoT solution, switching costs becomes high for the customer. I am not advocating to give away everything for free, but think about the offering before you decide on a model.”
Selling New Technology
Establishing a go-to-market strategy and pricing model are the first hurdle in IoT commercialization, but sales strategy is the second. Bringing new a technology to market poses different challenges than launching a new product with your sales team. If your technology is disruptive, your challenges only multiply. Most businesses will need to rethink their sales strategy across three dimensions when bringing an IoT solution to market: (1) sales techniques and skills, (2) incentives, and (3) buyers.
Sales methods, like business models, are not one-size-fits-all. There is a good chance that when your go-to-market strategy changes, your sales techniques will need to, as well. What was once a transactional sale may now become a relationship sale. A salesperson who built their career nurturing large deals may find themselves selling add-on data subscriptions to the base product to build recurring revenue streams. These fundamental changes mean the team needs to not only learn new sales techniques, but also develop new skills. It may also mean hiring new people. Although it is derogatory to call one’s salesforce “coin operated,” incentives are important and should not be ignored. With any new product or service offering, the purchase decision maker may change, or new stakeholders may appear. Product management teams should also develop new customer segmentation to inform their value propositions and messaging for the sales team to use with all types of stakeholders.
During the panel discussion, one executive discussed the challenges her organization faced commercializing IoT solutions: "The harder part is: how do you make sure your sales people know how to sell your IoT offering and who to sell it to? One lesson learned on our side was that despite how difficult it was to engineer the product, the fundamental buyer changed. The person, ‘boiler Bob’, who made a comfortable living selling and installing our product and parts, is not making the decision on IoT services. And our sales people who sold to ‘boiler bob’ didn’t know how to sell these services. They pushed back on changing the way we sold and who we sold to because they did not want to damage their existing relationships. We thought of developing different channels for selling services because of these dynamics." Another panelist shared a similar experience: "We sold large capital equipment. When you talk about IoT, you want to create an annuity, constant revenue stream. However, our sales channel was use to one time big sales. As a result, we had a tough time with sales. Who wants to go do one-time sale versus recurring revenue? It does require a certain amount of patience and a different mindset and approach."
Despite the challenges manufacturers experience developing and launching IoT solutions, the industry is moving forward. To learn more about the current state of manufacturing’s digital transformation of the manufacturing industry, read this summary of MAPI’s recent research.